Military bonus best used to make family secure

Just ask our military. It is handing out handsome bonuses to recruit as well as retain personnel. The amount soldiers get depends on the service branch and specific job specialty.

In October, the Army introduced a new "Active First" program that promises up to $60,000 in bonuses to recruits who opt for 30 to 48 months of active duty, then transfer to the National Guard.

Without this cash carrot, it might be difficult to maintain troop levels for the war in Iraq.

For many military personnel, the bonuses can make a big difference. That is, if the money is used wisely.

An Army captain serving in Mosul, Iraq, wanted to do the right thing with his bonus. George, who asked that I not use his last name, wrote to me asking how to best use $26,000 (after taxes) he received in exchange for agreeing to stay in the Army for at least another three years. The money would boost his family's total savings to $37,000. By the way, the couple is expecting a baby.

"My wife and I have discussed paying off one of our cars, which we owe over $14,000 on at 6 percent interest," George wrote in an e-mail. "Now that the money has hit the bank, my wife went wishy-washy. She wants to hold on to the money, and keep on making [car] payments for 30 more months. Our other debt is $1,267 a month for our mortgage, $3,300 owed on furniture, and $2,000 at Home Depot and on one credit card. I need some advice."

Here's what I recommended:

First, figure out what they must spend to run their household for three months (mortgage, food, cable, utilities, entertainment, etc.). This should also include any future child-care costs they anticipate with the new baby. Their monthly expenses - including mortgage payments on a rental property in Florida - come to about $3,500 a month (not including monetary supplements from the Army). That means they should have at least $10,500 in an emergency fund.

Next, they should set aside about $2,000 for what I call the "Life Happens Fund." This is the money you should use for unplanned expenses, such as car repairs.

After setting up these two funds, which should be kept separate from everyday checking or savings accounts, I advised George to tackle their consumer debt.

I recommended they start not with the car but the $5,000 owed on furniture, to Home Depot and on the credit card. After tackling that debt, they should pay off the auto loan.

So let's go through the numbers:

George and his wife start with $37,000 (including the $26,000 bonus) minus $10,500 (emergency fund). That brings them a balance of $26,500.

Subtract the $2,000 (Life Happens Fund) for a savings balance of $24,500.

After setting aside the savings and paying off the debt, they're still left with an extra $5,200 from the original $37,000. That would put them in an awesome financial position and way ahead of many debt-laden families in this country.

As a 16-year veteran, George is clearly a good soldier. He's already begun to implement my orders.

"Good news," George wrote back to me within the same week. "We paid off the Depot, the [furniture], and the one credit card. That alone was $505 a month of payments. Soon another $407 will be available too [when we pay off the car]."

Freeing up money has made George think about a college fund for his 11-year-old son from a previous relationship.

"As a military person, I always assumed that he would join the service when the time comes, but it may not happen that way," he said.

With less debt, George can fund a 529 college savings plan. He might take some of the remaining $5,200 and jump-start the college fund. The remaining money could be used for the new baby expenses.

I asked George, what's it like to be free of that debt?

"I can actually feel like I can relax and not be worried about bills, or not having money, or being scared to go to the mailbox as I used to," he said. "You cannot put a price on that feeling."

I hope more military personnel follow George's example and use any money they're awarded for putting themselves in harm's way to become as debt-free as possible. It would at least be one less thing they have to worry about as they risk their lives for our nation.

Michelle Singletary is a Washington Post business writer. She can be reached at singletarym@washpost.com or c/o The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.